Thursday, January 31, 2013

You will not get big dips. Right now, we are very close to a buying point after yesterday's selloff. If we can get a little more dip down to 1490, that is a buying opportunity. Then hang on and ride it to 1525. The GDP number doesn't matter, that is history. The nonfarm payrolls might come in a bit light and that will be your chance to buy if we don't go down today.

It surprises me how investors can like FB and hate AMZN. They are both thinking long term, except one has a strong long term vision (Bezos), while one has a horrible platform for making money (Zuckerberg). A long AMZN, short FB pair will make tons of money over the next 2 years.

Tuesday, January 29, 2013

The FOMC announcement is Wednesday and I see a potential here for the market to have a 1 day selloff. Yes, just 1 day, before we bounce back. The expectations for this meeting are nothing, and I find it hard for the Fed to be any more dovish than they have been. Given the strong stock market and OK jobs numbers, if there is any change, it will be towards ending QE infinity earlier than people expect. This will dip stocks and strengthen the dollar, but the biggest effect will be on gold. Gold is already lagging badly and any hints of an improving economy in the Fed economic outlook will crush gold.

I don't see anything more than a 1% pullback from these levels. And it is definitely possible that we just trade in a tight range and keep grinding higher like we have for the past month. I don't see an edge in shorting here, its better to try to buy on those 1% dips and ride it higher until we get to 1520-1530.

Saturday, January 26, 2013

Back in the late 1990s, when internet stocks were at the height of investor minds, you had daily debates about who the long term winners would be in the internet revolution. AMZN, YHOO, AOL were the big ones that people debated. But later on, B2B and internet infrastructure companies became the hot thing. Well, most of the B2B and infrastructure names have imploded. So has AOL and YHOO, although AOL was saved by dumb management at Time Warner and YHOO had the most clueless management in the business making dubious acquisitions. Giving up 20% of your company in the form of stock dilution to acquire Geocities? And another 20% to acquire Broadcast.com? Are you kidding me? Mark Cuban must still laugh at the thought of selling his crap start up for several billion in YHOO stock.

I really thought YHOO would end up being the winner, because they were the best positioned on the internet, the center of everything, but they had no vision and they let GOOG steal their lunch. I didn't imagine that the public would embrace online retail as much as it has. It has turned Best Buy into AMZN's showroom.

AMZN has taken over and is now almost a monopoly in the space. It is better than GOOG, which is solid, but on the internet, you have too many competing for a set amount of advertising dollars. With online retail, being able to shop for everything in one place with deep selection is a huge advantage. Aside from groceries and maybe clothes, almost everything is preferable buying online. And when you get to AMZN's size, WMT's size, you have pricing power. You can squeeze your suppliers like WMT does and sell things cheaper and still have the same margins as your competitors.

Stocks are all about perception, the future, not the current P/E ratio. Otherwise AAPL would still be at $700. AMZN has that future where it can keep growing and become the WMT of the internet. WMT's market cap is twice as large as AMZN. I would not be surprised to see AMZN catch up and surpass WMT's market cap over the next 3 years.

Friday, January 25, 2013

The badly positioned longs in AAPL are dumping, the shorts in NFLX are getting squeezed to death, gold just keeps going lower despite a higher euro and strong risk on environment, and S&P shorts are all in the red right now.

The trendiness of this market is amazing, and points out that trend following is alive and well. Nothing motivates an investor to act more than bleeding capital and continued pain from underperforming the averages again. Liquidation Friday in a sea of liquidity. Don't fight it. 1520 is beckoning.

Thursday, January 24, 2013

AAPL's relative weakness over the past 2 months hasn't stopped the S&P from going higher, why would it now?

AAPL is in a world of its own, with a cult-like fan base despite the deteriorating fundamentals. Valuation is still too high and not many are forecasting what I see as a repeat of the Apple computer debacle in the 1990s, when overpriced Macs got crushed by a flood of cheaper, faster and more prolific competitors. Samsung, MSFT, RIMM, Nokia, HTC, Motorola, etc. will shrink AAPL market share as phones and tablets become commoditized.

There is no near term catalyst to
take this market lower. The debt ceiling can has been kicked for 3 months, earnings have been
mostly beats, with few exceptions.

The bears and underinvested fundies must be quite frustrated with this market, with no corrections and just grind it higher action day after day. This is a hedge fund / institutional ruled market, there is very retail money playing here. Retail gave up on stocks after 2008 and they will not come back for several years.

The hedgies and institutions follow the herd, they pile in until the market reaches a saturation point. I will wait to see some intraday volatility before I am willing to take a short position for more than a daytrade. Obviously, we aren't there yet.

Wednesday, January 23, 2013

It is not an S&P trader's market, unless you are a fearless bull. I have been leaning bullish since the beginning of the year and even yesterday's strength surprised me ahead of IBM and GOOG earnings. Of course both companies beat low expectations. Last quarter really lowered the bar for this quarter's earnings so you will have lots of pops on earnings reports, even though they really aren't good. I have learned over the years that odds usually favor the bulls for most earnings reports, just by the nature of how the earnings expectation game is played. The sell side keeps the bar low for easy beats.

Right now, it feels like another 5-10 points higher this week and that's an OK short opportunity for a quick 1-2 day trade. But really, this market is so bullish that playing short is really going against the odds here. And it seems like its too late to get long, but I am probably wrong about that.

We have the big Kahuna, AAPL reporting after the close today. The bar has been set low of course, with AAPL's absurd lowball guidance. But I don't see the stock popping much on an earnings beat, with its deteriorating fundamentals and likely weak guidance. The options buyers in AAPL will probably be unhappy tomorrow, I don't expect a big move either way.

Friday, January 18, 2013

AAPL has built up a huge following with its amazing stock performance over the past decade. Ever since the ipod came out, and then the iphone and ipad, the momentum kept on building. But in a free market, eventually big profit margins attracts competition, and margins get squeezed. Unless AAPL comes up with a new product that differentiates it from the competition, they are just another smartphone tablet PC company. With Steve Jobs gone, that is unlikely to happen.

Eventually, the telecoms will not subsidize AAPL when its not sufficiently attracting new customers. The cache of owning AAPL is fading fast, as the competition has caught up and surpassed in product quality. You cannot keep selling the same products as everyone else for higher prices just by sticking an Apple logo on it.

AAPL has been able to accumulate huge profits because of their big gross margins, the ability to charge more than everyone else and still be able to sell your product. They were able to do this because their product was superior and unique. That is no longer the case. That phase of the company is over. If they insist on overpricing their products versus the competition, they will keep losing market share.

The next big shoe to drop in AAPL will be the rapid shrinking of gross margins. If they don't want to sacrifice gross margins by lowering prices, they will have to take a hit on revenues. Pick their poison, but they will not be able to avoid both scenarios.

Right now, the majority of AAPL longs are in denial, but AAPL is no longer a growth stock. It is now a value stock, and those trade much differently. Going from growth stock to value stock means losing the growth investors and having to attract value investors, who only want to buy on the cheap, and will not chase AAPL higher. Right now, AAPL is in purgatory, on its way to value hell.

Tuesday, January 15, 2013

2013 will likely be the year that hedge funds officially bury themselves into oblivion. It is a mystery to me what attracts so many institutions and the wealthy to invest in hedge funds. It must be the cache of being an exclusive investor, because it sure ain't the returns. Hedge funds as a whole have lagged the S&P over and over, and now they are pushing out on the risk curve, adding leverage like they haven't in years.

Aside from a handful of elite hedge funds, most are just copycats, swaying to the whims of the latest headlines and exhibiting herd behavior. It is no wonder that they are now so leveraged at new highs with probably the most unfavorable fundamentals and valuations since the bottom in 2009.

But this topping process will take weeks, perhaps a couple of months, so there is no rush to short. When there are no more things to worry about (after earnings and debt ceiling), around March, that is the time to strike on the short side. The funds are not all in yet, but they are getting closer to that point. Just in time for the effect of the payroll taxes and higher taxes to start weighing on the economy.

The dips will be shallow since we have options protection this week, after opex, the market will trade more two way. Right now, bulls still have the edge.

Sunday, January 13, 2013

The quickest way to lose money in the market is not from ignorance. It is from overconfidence. If you overestimate your edge, or even have negative EV,and trade according to a Kelly formula which I discussed years ago, you are putting yourself at risk of a crippling drawdown and eventual KO.

Compounding works both ways. It makes multiplying your money faster but also makes it much slower to comeback from deep losses. Losing 20% of your money 3 times in a row (1 to 0.80 to 0.64 to 0.512) has a less negative effect on your bankroll than losing 50% one time (1 to 0.50). After losing 50%, it takes a 100% return to get back to the starting point. After dropping 80% of your money, it takes 400% return to get back to starting point.

Let's say your have a trader that follows Kelly betting to optimize the growth rate of bankroll, and believes he wins on 3 out of 4 trades, or has a 75% win rate for 1 to 1 risk reward bets, thus would bet 2(0.75) - 1 = 0.50, or 50% of his roll on each bet. But in actuality, he has an expected 60% win percentage. A random sample of W W L L W L W W L W (6 - 4) would result in the following: 1, 1.5, 2.25, 1.13, 0.56, 0.84, 0.42, 0.63, 0.95, 0.47, 0.70. Despite an expected value of profit of 0.44 (44%) (6 wins, 4 losses), the account shows a loss of 0.3, or 30%. There in lies the danger of overbetting due to overestimating your advantage with Kelly betting. Unlike blackjack, it is impossible to determine your exact edge on each trade in the financial markets. So one must err on the side of conservatism when following Kelly.

From experience trading both stocks and futures, in the futures market, you just won't find some of the big edges that you can find in individual stocks. There is a definite tradeoff between liquidity and percent edge. The less liquid markets provide bigger edges for those that know what they're doing.

Friday, January 11, 2013

The wall of worry remains, mainly earnings and the debt ceiling. Both will be bear duds. They have obvious outcomes and traders aren't going to fall for the same trick twice. This is a hedge fund ruled market, markets go straight up with few, and shallow pullbacks all the way to the top, flatline for a while, and then go straight down with no pullbacks. It is not like your old markets, its a new market with few retail and mostly institutions and black boxes at work. Trendy with sharp reversals.

Wednesday, January 9, 2013

The past two days we've had minor selling and it looks like we've shaken out some weak hands. With the fiscal cliff behind us, the new year, and funds looking to allocate more to stocks, you have an underlying bid that will last until the funds are done allocating. I don't think they are done seeing how dry this market trades. We should keep grinding in low volatility trade and eventually work our way to ES 1470.
There is a belief that the VIX is low and put options are cheap right now, having heard this a few times on CNBC. Well, when the market trades in 8 point ranges, day after day, do you expect the VIX to hold up? I would have to say VIX is still a bit too high considering the lack of volatility post fiscal cliff. Sure, the debt ceiling will increase volatility, but probably not by much. The debt ceiling is such an artificial crisis with an obvious ending that I can't imagine anyone with serious money being truly scared of that event. And with earnings, the game is so rigged with such a low bar to jump over and with the Hurricane Sandy excuse that it should be uneventful.

Sunday, January 6, 2013

Jeff Gundlach tells it like it is a couple weeks ago. Don't agree about China, but he's right that S&P is priced richly and recession is coming soon with concurrent repricing. I expect long term Treasuries to outperform the S&P in 2013.

Friday, January 4, 2013

The Fed put in a little nugget in its minutes which got bond holders and dollar bears nervous. The Fed is trapped, and they cannot pull out of QE infinity. If long term yields are allowed to rise back to where they were just 2 years ago, there will be severe pain at the banks and at many bond funds. It would be a disaster. It is a roach motel situation, you can get in, but you can't get out. Treasury yields will remain low forever, it is Japan revisited where central banks need to keep yields low for the federal government to be able to manage its interest payments.

It is a mass migration from bonds into equities, we are in the 6th or 7th inning, so even though equity fundamentals are bad, and getting worse, you have a search for yield as investors are getting more and more comfortable with equities. Expecting continued upside in stocks for at least another week.

Thursday, January 3, 2013

This market shouldn't be this strong. Not with the expiration of a chunk of tax cuts, future spending cuts, and with slowing earnings growth. But free money from the Fed can make the market do mysterious things. A mysterious levitation that defies logic but you can't fight it yet. I originally planned on going short today, but the price action screams to me that the highs at 1475 SPX will be retested, and perhaps surpassed marginally. So I will wait for the bulls to overreach before going short. But I am not daring enough to play the bull side at this stage in the game. Expecting more short squeezing ahead of the nonfarm payrolls as the ADP number of 215K has probably gotten bears nervous.

Wednesday, January 2, 2013

Now that the fiscal cliff deal is done and we get the rally out of the way, I want to look ahead for the rest of the month.

First, nonfarm payrolls, which has squeezed the shorts the past 3 months. Expectations have risen with the lower jobless claims numbers over the past few weeks, so I don't see much room to beat those rising expectations.

Second, earnings. Earnings will be a catalyst as traders focus back on fundamentals and see an economy that will no longer have the payroll tax cut, some of the Bush tax cuts, and have higher cap gains and dividend taxes. With earnings growth slowing and facing an environment with fiscal headwinds, an improving housing market will not be enough to overcome this. Analysts are still too optimistic with earnings guidance which sets up room for disappointment again this quarter.

Third, debt ceiling debate. Although I view this as an artificial crisis, traders have a seering memory of the debt ceiling debacle in the summer of 2011. That by itself is enough to be a catalyst for investors to de-risk ahead of this. Also, the fact that spending cuts will be mixed in will only serve to emphasize the increasing fiscal austerity that will be implemented this year.

So the bulls are having their day in the sun right now, but it should be quite brief. Expecting a typical first day of year rally and then back to reality starting from the nonfarm payrolls number issued on Friday. Thursday should be a good entry point for short positions to ride down for a few weeks.

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